CHAPTER 2 STRATEGY AND TECHNOLOGY: CONCEPTS AND FRAMEWORKS FOR UNDERSTANDING WHAT SEPARATES WINNERS FROM LOSERS

LEARNING OBJECTIVES Define operational effectiveness and understand the limitations of technology-based competition leveraging this principle. Define strategic positioning and the importance of grounding competitive advantage in this concept. Understand the resource-based view of competitive advantage. List the four characteristics of a resource that might possibly yield sustainable competitive advantage.

DANGERS OF RELYING ON TECHNOLOGY Firms strive for sustainable competitive advantage. –Sustainable competitive advantage: Financial performance that consistently outperforms industry averages. –Difficult to achieve due to the rapid emergence of new products and new competitors. Competitors cut costs, cut prices, and increase features in order to achieve comparative advantage.

DANGERS OF RELYING ON TECHNOLOGY Michael Porter’s concepts are useful for firms attempting to achieve comparative advantage: –Value chain –Five forces Porter states that firms defining themselves according to operational effectiveness suffer aggressive, margin-eroding competition. –Operational effectiveness: Performing the same tasks better than rivals. –The danger lies in similarity, failure to innovate. When offerings are roughly the same, they are more commodity.

DANGERS OF RELYING ON TECHNOLOGY Fast follower problem exists when competitors: –Watch a pioneer’s efforts. –Learn from their successes and missteps. –Enter the market quickly with a comparable or superior product at a lower cost before the first mover can dominate. –Because technology can be matched quickly, firms that pioneer in technology are especially susceptible to this problem.

TECHNOLOGY AND STRATEGIC POSITIONING Strategic positioning: Performing different activities than rivals, or the same activities in a different way. –Technology should create and enable novel business approaches that are defensibly different and can be difficult for others to copy. E.g., The FreshDirect model: –Provides innovations such as: Worker shifts are highly efficient. Firm buys and prepares its own goods. Higher inventory turns (number of times inventory is sold or used during a given period). Use of artificial intelligence and climate-controlled rooms. –In exchange, they receive more favorable supplier terms with stores: Sharing data to improve supplier sales and operations Paying in days rather than in weeks

RESOURCE-BASED VIEW OF COMPETITIVE ADVANTAGE To maintain sustainable competitive advantage, a firm must control a set of exploitable resources that has four critical characteristics: –Valuable –Rare –Imperfectly imitable (i.e. difficult to copy) –Non-substitutable Resource-based thinking helps to avoid entering markets simply because growth is spotted.

LEARNING OBJECTIVES Understand that technology is often critical to enabling competitive advantage, and provide examples of firms that have used technology to organize for sustained competitive advantage. Understand the value chain concept, and be able to examine and compare how various firms organize to bring products and services to market. Recognize the role technology can play in crafting an imitation- resistant value chain, as well when technology choice may render potentially strategic assets less effective. Define the following concepts: brand, scale, data, and switching cost assets, differentiation, network effects, and distribution channels. Understand and provide examples of how technology can be used to create or strengthen the resources mentioned above.

POWERFUL RESOURCES Being aware of major sources of competitive advantage can help managers: –Recognize an organization’s opportunities and vulnerabilities. –Brainstorm winning strategies. Firms with an effective strategic position can create assets that reinforce one another. –Creates advantages that are difficult for rivals to successfully challenge.

IMITATION-RESISTANT VALUE CHAINS Value chain: Set of activities through which a product or service is created and delivered to customers. For example, elements in FreshDirect’s value chain work together to create and reinforce competitive advantages that others cannot easily copy. A WAY OF DOING BUSINESS THAT COMPETITORS STRUGGLE TO REPLICATE AND THAT INVOLVES TECHNOLOGY IN A KEY ENABLING ROLE

IMITATION-RESISTANT VALUE CHAINS Incumbents would be straddled between two business models, unable to reap full advantages of either. –Straddling: Attempts to occupy more than one position, while failing to match the benefits of a more efficient, singularly focused rival. Late-moving rivals struggle. –As FreshDirect’s lead time allows it to develop brand, scale, data, and other advantages that newcomers lack.

THE VALUE CHAIN Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Assisted by the secondary elements of: Infrastructure Human Resources Technology Procurement

THE KEY FRAMEWORK OF THE VALUE CHAIN Firms may have a critical competitive asset when they have an imitation-resistant value chain. Value chain framework can be used to consider a firm’s differences and distinctiveness compared to rivals. Analysis of a firm’s value chain can reveal operational weaknesses. Technology is of great benefit to improving the speed and quality of execution. Firms can buy software and tools: –Supply chain management (SCM) –Customer relationship management (CRM) –Enterprise resource planning software (ERP) Potential danger: Adopting software that changes a unique process into a generic one.

BRAND A strong brand can be an exceptionally powerful resource for competitive advantage. Consumers use brands to decide which company’s products are better, thus forming brand loyalty. Technology helps in rapidly and cost-effectively strengthening a brand. Viral marketing: Leveraging the enthusiasm of consumers to promote a product or service THE SYMBOLIC EMBODIMENT OF ALL THE INFORMATION CONNECTED WITH A PRODUCT OR SERVICE

SCALE ADVANTAGES Businesses benefit from economies of scale: Costs can be spread across increasing units of production or in serving multiple customers. Organizations are scalable if they benefit from scale economies as they develop. Developing firms may gain bargaining power with their suppliers or buyers.

SWITCHING COSTS Firms that seem dominant but that do not have high switching costs can be rapidly outshined by strong rivals. Sources: –Learning costs –Information and data –Contractual commitments –Search costs –Loyalty programs COSTS INCURRED BY CONSUMERS WHEN SWITCHING FROM ONE PRODUCT TO ANOTHER

DIFFERENTIATION Technology is used by firms to differentiate their wares. –Data plays a critical role in differentiation. –Commodities: products or services that are nearly identically offered from multiple vendors (e.g., gold, wheat).

NETWORK EFFECTS When the value of a product or service increases as its number of users expands. –Referred to as network externalities or Metcalfe’s Law. Switching costs play a role in determining the strength of network effects. Strong asset for firms that can control and leverage a leading standard.

DISTRIBUTION CHANNELS Through networked technology, users can be recruited to create new distribution channels. Affiliates: Third parties that promote a product or service, in exchange for a cut of any sales. PATH THROUGH WHICH PRODUCTS OR SERVICES GET TO CUSTOMERS

PATENTS Patents provide firms a degree of protection from copycats. Cut off paths to exploit an innovation. Considered to be unfairly stacked against start-ups. GRANT PROTECTION FOR INTELLECTUAL PROPERTIES; APPLICABLE TO INNOVATIONS DEEMED TO BE USEFUL, NOVEL, AND NONOBVIOUS

LEARNING OBJECTIVES Understand the relationship between timing, technology, and the creation of resources for competitive advantage. Argue effectively when faced with broad generalizations about the importance (or lack of importance) of technology and timing to competitive advantage. Recognize the difference between low barriers to entry and the prospects for the sustainability of new entrants’ efforts.

BARRIERS TO ENTRY, TECHNOLOGY, AND TIMING Barriers to entry for many tech-centric businesses are low. Market entry does not necessarily result in building a sustainable business. –Timing and technology alone will not yield sustainable competitive advantage. –Both can be enablers for competitive advantage. Moving first pays off when the time lead is used to create critical resources that are valuable, rare, tough to imitate, and lack substitutes.

LEARNING OBJECTIVES Diagram the five forces of competitive advantage. Apply the framework to an industry, assessing the competitive landscape and the role of technology in influencing the relative power of buyers, suppliers, competitors, and alternatives.

THE FIVE FORCES OF INDUSTRY COMPETITIVE ANALYSIS Rivalry among existing competitors Power of suppliers Potential new entrants Power of buyers Threat of substitutes

KEY FRAMEWORK: FIVE FORCES The internet can increase buyer power by increasing price transparency in markets where commodity products are sold. The more differentiated and valuable an offering, the more the Internet shifts bargaining power to sellers. –Price transparency: Degree to which complete information is available. –Information asymmetry: Decision situation where one party has more or better information than its counterparty.